Part of the terms that we talked about in the last post, I would like to stress on the importance of the amount of the fund you are asking for.
Yes of course, more money is always welcomed. However, this could be an issue that you need to watch out for.
When you think of the amount of the fund needed, be careful. Asking for too little might choke you, and asking for too much might spoil you! Yes you read it right, entrepreneurs get spoiled by big cash.
In our case, we asked for too much fund at the start, and this taught us a lot of good lessons.
In general, some of the adverse effects of getting a fund bigger than you actually need:
- You give away more equity than what you should
- You might lose focus on the cost items that really matter to your growth
- You get more experimenting and lenient with hiring, instead of spending the right efforts to get the right people
- You might not focus on optimizing your operations and processes. This will burn you cash faster and you would need to raise fund sooner than you expected
- You might lose track of the core of your startup, and get more driven by too much innovation at the early stage. Innovation is good, but as a startup, founders need to focus and perfect one hero product
- You could spoil yourself or the team by paying for fancy stuff, because you know there’s a lot of cash in the bank
Having said that, if you manage to get a real tough CFO / Finance manager to keep you on track, and/or you have developed a good financial discipline within your company, having bigger fund might help you grow faster and achieve some of the startup’s goals sooner. It could also put you at ease when issues or troubles come your way.
On the other side, having a smaller fund than you need could:
- Limit your ability to spend on growth related items
- Delay the achievement of some goals (being focused on cost optimization / cutting costs)
- Waste some of your key people’s valuable time on mechanical tasks
- Affect the spirit of your employees, which introduce the risk of losing team members
- Push you to raise another round of funds sooner than needed which leads to losing more equity
Don’t panic, there are some mitigation steps you can take to avoid both of the above scenarios. You can:
- Spend extra good efforts on your financial plan and make sure you run it by experts who are aware of the LOCAL context. Also plan for a reasonable buffer for unexpected events
- Introduce proper accounting and financial management in your startup AS SOON AS POSSIBLE
- Create and track financial related KPIs for your company.
- Keep the board of directors informed monthly, if not weekly, on the financial status of the company
- Invest your own money in the company (if you have), and if you don’t, then truly feel that the money being spent is coming out of YOUR OWN POCKET
- Learn from startups similar to you (in size or scope) how they spend and what mistakes you should avoid
- Always, ALWAYS, think of optimized ways to get what you want EVEN if you have the money for it. This could be by learning about tricks in the procurement field.
- Be creative in incentivizing your team through non-financial means
- Terminate unhealthy contracts and fire dead weight staff, these things eat up your money insanely
- Review your plans quarterly to ensure you are on track and to fix issues early on
These are not all the ways you can avoid the effects of the wrong fund amount, but I hope they would alert you to plan better.